Charitable Gift Planning

Charitable Gift Planning A Practical Guide for the Estate Planner Second Edition Thomas J* Ray, Jr. Section of Real Property, _,..,... r 7 Defending Liberty Probate and Trust Law Pursuing justice

CONTENTS About the Author Preface to the Second Edition Acknowledgments Introduction xiii xv xvii xix CHAPTER 1 Charitable Deduction Rules for Gifts by Individuals and Their Estates 1 Introduction 1 The Individual Income Tax Deduction 1 Qualified Organizations 2 What Is a Deductible Gift? 3 When Is a Gift Deductible? Valuation 19 22 The Reduction Rules 27 Taking the Income Tax Deduction 48 The Gift Tax Charitable Deduction 58 Qualifying Charities 60 Substantiation Requirements 61 The Charitable Deduction and Value Adjustment Clauses The Estate Tax Charitable Deduction 61 63 Qualifying Charities 65 Qualifying Transfers Ascertainable Requirement 66 70 Death Taxes Generation-Skipping Transfer Tax 70 73 CHAPTER 2 Donor Controls and Private Foundations 75 Introduction 75 Donor Controls on Inter Vivos Contributions 75 Earmarked Gifts 76 Contingent Gifts 83 v

vi CONTENTS Private Foundations 85 Establishing a Private Foundation 92 Operational Restrictions 99 Administrative Requirements 140 Private Foundation Alternatives Terminating a Foundation 146 154 CHAPTER 3 Foundation Substitutes 159 Introduction 159 Supporting Organizations 159 Supporting Organizations Under the Treasury Regulations.. 161 Supporting Organization Reforms Enacted by the Pension Protection Act of 2006 178 Community Foundation 190 Donor-Advised Funds 192 Congress Responds 192 Donor-Managed Investment Accounts 198 CHAPTER 4 Charitable Remainder Trusts 201 Introduction 201 Legislative Background 203 Rules Governing the Creation and Operation of Charitable Remainder Trusts 205 The Grantor 205 The Grantor Trust Rules and the Date of Creation 208 The Trust Must Qualify for the Income, Gift, and Estate Tax Charitable Deduction 213 The 10 Percent MRI Test 214 Noncharitable Benefits Limited to Payment of the Unitrust Amount or Annuity Amount 215 Investment Restrictions 220 Private Foundation Excise Taxes Tax-Exempt Character of the Trust 223 223 Irrevocable and Unamendable 223 Return of Assets Rules Regarding Payout from Charitable Remainder Trusts 228 229 Charitable Remainder Annuity Trusts 230 Charitable Remainder Unitrusts 232 Comparing Annuity Trusts and Unitrusts 238 Permissible Recipients Term of the Trust 243 249 Taxation of Distributions to Recipients Determining the Donor's Charitable Deduction 253 262 Income Tax Consequences 262 Gift Tax Consequences 268

Contents vii Estate Tax Considerations 276 Generation-Skipping Transfer Tax Considerations 279 Distribution of the Remainder Interest 282 CHAPTER 5 Dangerous DIPS for Charitable Remainder Trusts 285 Introduction 285 Debt 285 Recourse Mortgage Debt 285 Unrelated Business Taxable Income and Debt-Financed Income 286 Bargain Sale Consequences 290 Investments 292 Investments Generating Unrelated Business Taxable Income 292 Stock Options Comprehensive Environmental Response, 306 Compensation, and Liability Act (CERCLA) 319 Prearranged Sales The Current Standard: Revenue Ruling 78-197 320 320 Applying Revenue Ruling 78-197 324 Corporate Redemptions 325 Self-Dealing and the Other Private Foundation Rules Self-Dealing and Charitable Remainder Trusts 328 328 Application to Charitable Remainder Trusts 332 CHAPTER 6 Financial and Estate Planning Applications for Charitable Remainder Trusts Introduction 335 335 Charitable Remainder Trusts and Irrevocable Life Insurance Trusts Irrevocable Life Insurance Basics 336 336 Using the Irrevocable Life Insurance Trust with a Charitable Remainder Trust 339 The Mechanics 340 Retirement Unitrusts and "Spigot Trusts" 344 Using a FLIP-CRUT for Retirement Planning 345 "Spigot Trusts" 349 Education Unitrusts 357 Income Tax Benefits 358 Gift Tax Considerations 358 Structuring the Gift 359 The QTIP/CRUT Combo Partial Gift and Sale 361 362 Stop the Bleeding, Part I 366

viii CONTENTS Accelerating the Remainder Interest 366 Cashing Out the Unitrust Interest 368 CHAPTER 7 Other Deferred Giving Arrangements Introduction 373 373 Life Insurance Gifts Income and Gift Tax Rules 373 374 Estate Tax Consequences 379 Using Insurance within a Charitable Remainder Trust 381 The Demise of "Charitable Split-Dollar" 385 Reporting Requirements Charitable Gift Annuity 389 390 How the Annuity Amount Is Determined 392 Terms of the Annuity Payment 392 - Income Tax Deduction to the Donor 393 Deferred Payment Gift Annuity 399 Gift Tax Consequences 400 Estate Tax Consequences 401 Regulation of Gift Annuities 402 Planning Opportunities 404 Stop the Bleeding, Part II: A CRT "Rolled Over" to a Gift Annuity 405 Gift of Future Interest in a Personal Residence or Farm 406 What Is a "Personal Residence" or "Farm"? 407 Structuring the Transaction 409 Tax Consequences 412 Qualified Conservation Contributions 417 Qualified Real Prop'erty Interest Qualified Organization 418 420 Use Exclusively for Conservation Purposes Income Tax Deduction 421 426 Transfer Taxes 429 Notice 2004-41 432 CHAPTER 8 Charitable Lead Trusts ; 433 Introduction 433 Legislative History 437 Required Payments The Guaranteed Annuity Interest 438 438 The Unitrust Interest 445 Trust Characteristics 448 Grantor 448 Irrevocability of the Arrangement 448 Permissible Income Beneficiaries 448

Contents ix Term of the Trust 455 Private Foundation Restrictions 457 Taxation of the Charitable Lead Trust 457 Source-Ordering Income Payments Effect of Unrelated Business Taxable Income 458 460 Capital Gains 461 Earnings in Excess of the Annuity or Unitrust Amount 461 Tax Benefits to the Donor 462 Income Tax Consequences to the Grantor 463 Gift Tax 464 Estate Tax 467 Generation-Skipping Transfer Tax 467 Testamentary Charitable Lead Trusts 471 "Grantor" Charitable Lead Trusts 472 Triggering the Grantor Trust Rules Income Tax Rules for Contributions to "Grantor" 473 Charitable Lead Trusts Gift Tax Consequences: Grantor Charitable Lead Trust 475 476 Grantor Charitable Lead Trust Created during the Grantor's Life 477 The "Supergrantor" Charitable Lead Trust 477 CHAPTER 9 Financial and Estate Planning Applications for Charitable Lead Trusts 479 Introduction 479 The "Double Discount" Charitable Lead Trust/Family Partnership Combination 479 Family Limited Partnership 479 The Charitable Lead Trust and Family Limited Partnership Combination 480 Caveats 482 The "Layered" Testamentary Lead Trust 483 The Testamentary Charitable Lead Trust and Charitable Remainder Trust Combination 486 "Batting Cleanup": Using Testamentary Charitable Lead Trusts to Effectively Eliminate Estate and Generation-Skipping Transfer Taxes 488 Using the Testamentary Lead Unitrust to Zero Out Taxes... 488 Maximizing the Generation-Skipping Transfer Tax Exemption with a Testamentary Lead Unitrust 490 Using the Lead Annuity Trust and Lead Unitrust Together... 490 CHAPTER 10 Trustee Issues 493 Introduction 493

x CONTENTS Charitable Remainder Trusts 493 Potential Trustees under State Law 493 Federal Tax Consequences of Self-Trusteed Trustees 496 Cautions on Self-Trusteed Trusts Charitable Lead Trusts 503 508 CHAPTER 11 Charitable Planning with Retirement Plan Assets Introduction 511 511 Lifetime Transfers of Retirement Plan Assets 513 Testamentary Transfers of Retirement Plan Assets to Charity 523 IRD Basics Interplay of the MRD Rules and Charitable Contributions 525 of Retirement Assets Passing Retirement Plan Assets to Charity 527 through an Estate or Trust 536 Charitable Remainder Trust Applications 544 Retirement Plan to Testamentary Charitable Remainder Trust 545 The Charitable Remainder Trust as a Credit Shelter Trust for Retirement Plans 553 Special Considerations for Certain Lifetime Distributions of Qualified Plan Assets Other Methods 561 569 Gift Annuities 570 Charitable Lead Trust 571 CHAPTER 12 Charitable Planning with Business Assets 573 Introduction 573 Charitable Giving by Business Entities 573 Contributions by C Corporations 573 Contributions by Flow-Through Entities 577 Charitable Tax Planning Using Business Assets 579 Sole Proprietorships 580 Partnerships and Other Pass-Through Entities 587 S Corporations 592 C Corporations 602 Appendix 1: Drafting Guide for Private Foundations 613 Appendix 1-1: Private Foundation Articles of Incorporation 617 Appendix 1-2: Private Foundation Organizational Minutes, Bylaws, and Conflict of Interest Policy 623 Appendix 1-3: Private Foundation Trust Agreement 641

Contents xi Appendix 2: Drafting Guide for Charitable Remainder Trusts 651 Appendix 2-1: Revenue Ruling 72-395 Appendix 2-2: Revenue Procedures 2003-53 Through 2003-60 657 683 Appendix 2-3: Revenue Procedures 2005-52 Through 2005-59 701 Appendix 2-4: Charitable Remainder Annuity Trust Agreement... 735 Appendix 2-5: Charitable Remainder Unitrust Agreement 745 Appendix 3: Drafting Guide for Life Estate Reserved Agreement and Gift Annuities 757 Appendix 3-1: Gift Annuity Agreement (One Life) 759 Appendix 3-2: Gift Annuity Agreement (Two Lives) 761 Appendix 3-3: Deed Establishing Life Estate Reserved, and Maintenance and Ownership Agreement 763 Appendix 4: Drafting Guide for Charitable Lead Trusts 767 Appendix 4-1: Charitable Lead Annuity Trust Agreement Appendix 4-2: Charitable Lead Unitrust Agreement 769 777 Appendix 5: ACGA Rates 785 Table of Cases 795 Table of Statutes 801 Table of Treasury Regulations 811 Table of Letter Rulings, Revenue Procedures, and Revenue Rulings.. 819 Index 827